UNITEDLABELS (ETR:ULC) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, UNITEDLABELS Aktiengesellschaft (ETR:ULC) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for UNITEDLABELS

How Much Debt Does UNITEDLABELS Carry?

The image below, which you can click on for greater detail, shows that UNITEDLABELS had debt of €5.85m at the end of September 2020, a reduction from €9.02m over a year. However, it does have €299.4k in cash offsetting this, leading to net debt of about €5.55m.

How Strong Is UNITEDLABELS' Balance Sheet?

The latest balance sheet data shows that UNITEDLABELS had liabilities of €5.95m due within a year, and liabilities of €9.16m falling due after that. On the other hand, it had cash of €299.4k and €1.45m worth of receivables due within a year. So its liabilities total €13.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €8.32m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, UNITEDLABELS would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since UNITEDLABELS will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year UNITEDLABELS wasn't profitable at an EBIT level, but managed to grow its revenue by 366%, to €12m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate UNITEDLABELS's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable €856k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of €1.3m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for UNITEDLABELS that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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